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Another question regarding paying down your mortgage...
Posted on 10/5/12 at 8:36 am
Posted on 10/5/12 at 8:36 am
I know the board is pretty split on paying off your mortgage or paying it off early. I am on the side of piece of mind by not having the payment. What am I missing in the example below that just happened to me:
Mortgage rate - 5.0%
Mortgage payment - $1,100 (OT poor)
Paid an additional $1,000 this month toward the principal
Our "Actual remaining term left" dropped 4 months. So, with that $1,000 principal payment, do I not automatically gain $4,400 over 30 years? And do I not gain 5.0% on that $1,000 over 30 years?
Not really trying to stir up the debate again, just trying to see if my train of thought is correct.
Mortgage rate - 5.0%
Mortgage payment - $1,100 (OT poor)
Paid an additional $1,000 this month toward the principal
Our "Actual remaining term left" dropped 4 months. So, with that $1,000 principal payment, do I not automatically gain $4,400 over 30 years? And do I not gain 5.0% on that $1,000 over 30 years?
Not really trying to stir up the debate again, just trying to see if my train of thought is correct.
7
Posted on 10/5/12 at 8:39 am to OnTheBrink
quote:
Mortgage rate - 5.0%
Depending on how much time you have left on the mortgage and your credit score a refinance might be a very good option...
Posted on 10/5/12 at 9:05 am to OnTheBrink
quote:
do I not automatically gain $4,400 over 30 years? And do I not gain 5.0% on that $1,000 over 30 years?
There is a big difference in today's dollars and dollars 30 years from now. It's a big point that a lot of people miss.
quote:
And do I not gain 5.0% on that $1,000 over 30 years
No. Not as long as mortgage interest is tax deductible.
Posted on 10/5/12 at 9:29 am to OnTheBrink
Does that $1100 include taxes and insurance payments? If it includes taxes and insurance, your principal and interest payments from that $1100 are actually less.
Mortgages are also front end heavy on the interest, and paying more towards the principal of the mortgage only shortens the number of payments you have. It does not alter the amount of interest that is taken from your monthly payment each month as this is all pre-calculated, and the amount of interest you are paying in that last year on a 30 year mortgage is hardly anything. For example, say you took a 30 year mortgage at 5% on $100K. In the last year of that loan, you are only paying $171 in interest.
If you have Excel, there is a template for Mortgage Loan that you can plug numbers in and see what actual principal and interest payments are, and you can also add additional principal payments into the formula to see how it affects when the loan is paid off.
Mortgages are also front end heavy on the interest, and paying more towards the principal of the mortgage only shortens the number of payments you have. It does not alter the amount of interest that is taken from your monthly payment each month as this is all pre-calculated, and the amount of interest you are paying in that last year on a 30 year mortgage is hardly anything. For example, say you took a 30 year mortgage at 5% on $100K. In the last year of that loan, you are only paying $171 in interest.
If you have Excel, there is a template for Mortgage Loan that you can plug numbers in and see what actual principal and interest payments are, and you can also add additional principal payments into the formula to see how it affects when the loan is paid off.
Posted on 10/5/12 at 9:42 am to OnTheBrink
As others have pointed out, you should keep in mind that your 5% note is a pre-tax rate. If you were in the 25% tax bracket before the writeoff, then your real return is only 3/4 of 5%, or 4.25%.
It's useful when thinking about paying a mortgage to think of it as a return on investment. You are basically investing in a bond that pays you 4.25% interest. If you that is a good return, go for it. 4.25% guaranteed isn't bad but keep in mind we haven't subtracted inflation yet, if you believe (as many do) that inflation will go up anytime over the next couple of decades this may not be a good idea.
Personally, I am doing a refi right now for 30 years at 3.25%, and have no plans to prepay. For me, prepaying only gives me a 2.4% ROI, which is probably a negative real rate. No way in hell I am prepaying that puppy.
It's useful when thinking about paying a mortgage to think of it as a return on investment. You are basically investing in a bond that pays you 4.25% interest. If you that is a good return, go for it. 4.25% guaranteed isn't bad but keep in mind we haven't subtracted inflation yet, if you believe (as many do) that inflation will go up anytime over the next couple of decades this may not be a good idea.
Personally, I am doing a refi right now for 30 years at 3.25%, and have no plans to prepay. For me, prepaying only gives me a 2.4% ROI, which is probably a negative real rate. No way in hell I am prepaying that puppy.
Posted on 10/5/12 at 10:32 pm to OnTheBrink
quote:Yes. You paid $1,000 now to avoid paying $4,400 later.
Our "Actual remaining term left" dropped 4 months. So, with that $1,000 principal payment, do I not automatically gain $4,400 over 30 years?
quote:The $1,000 you paid today will not be subject to the 5% interest over the remaining years left on the mortgage. So if you paid it on day one, yes, it would be 30 years.
And do I not gain 5.0% on that $1,000 over 30 years?
However, there are other factors such as inflation and tax deductions (if you qualify). So those numbers do have an asterisk. But on the surface, your logic is correct. I would consider refi if I were you. Unless you are planning to have this one paid off in three years, a refi on 30 years at 5% is a no brainer with today's rates.
Posted on 10/5/12 at 11:04 pm to OnTheBrink
Another way to look at this is to ask yourself "if I bought this house 30 years ago and did the same, where would I be"? The Average house in 1982 was 80k, with an average mortgage payment of $ 300/month. At today's mortgage rate, an extra payment in the begining could save you $1200 at the end of the mortgage (2012). Remember that a gallon of gas was around a dollar in '82 (and even cheaper in the mid 90's). And if you invested the money in the S+P 500, you'd have made >2000% from October '82 to October '12.
Posted on 10/6/12 at 11:41 am to OnTheBrink
What is missing here is the fact that you do not earn 5% on your money when you pay off a 5% mortgage note. You simply stop paying a note. The only way anyone earns money in this situation is to take the money and deposit in a 5% after-tax account.
Now run your calculation taking your extra payment at the time period you will make said payment at some earnings rate, while continuing to calculate your tax deduction dollar. This will give you a better understanding.
Now run your calculation taking your extra payment at the time period you will make said payment at some earnings rate, while continuing to calculate your tax deduction dollar. This will give you a better understanding.
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